Oil and Natural Gas Ratio Explodes to 52:1

The ink on our last article is barely dry when its dire prediction actually came true 48 hours later--natural gas price dropping below $2, a level not seen in over a decade. Henry Hub natural gas front month futures declined to $1.982 per 1,000 cubic feet (mcf) on Wed. April 11, its lowest level since January 28, 2002, when the price hit $1.91. Meanwhile, WTI crude oil rose by $1.68 to finish at $102.70 per barrel; Brent rude increased by 30 cents to finish at $120.18.

The confluence of these price movements also brought the ratio between WTI and Henry Hub to a historical record high of 52:1 (see chart below) while the ratio of Brent to Henry Hub is a jaw-dropping 60:1 ! (And we thought the 25:1 ratio reached back in August 2009, also a historical high at the time, was parabolic.)

Chart Source: ICIS.com

Crude oil and natural gas are both energy commodities and should logically have a high degree of correlation. Theoretically, based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio. However, due to various market characteristics, the price of oil typically had traded 8-12x that of natural gas in the past 25 years or so (see chart above). That historical pattern has started to deteriorate since 2009 primarily due to the combination of rising domestic production from unconventional shale gas depressing price levels, while geopolitical events in the MENA region (Middle East & North Africa) adding fear premium to the global crude oil prices.

Natural gas lacks the global market structure like crude oil, and tends to be regionally based thus less impacted by external sources. Oil, on the other hand, is a commodity with global demand drivers; and along with gold, trades as an inflation hedge against a weakening US Dollar.

In most of Europe and Asia, the price of natural gas/LNG is typically linked to crude oil under multiyear contracts. So while the spike in Brent helped to boost natural gas markers elsewhere, with practically zero LNG export capacity in the U.S., not even Fed's two rounds of quantitative easing could lift the languishing Henry Hub.

The chart below illustrates just how disconnected U.S. natural gas price is vs. price levels in Asia, Europe and Brent crude oil.

Chart Source: Valero Corp. conference presentation, March 2012

LNG (liquefied natural gas) is a relatively new technology that some believe has the potential to transform natural gas into a true global commodity. Unfortunately, as discussed before:

Realistically, U.S. gas cargos may have a hard time competing with other exporters such as Russia, Qatar and the up-and-comer—Australia--in the Asian and European markets due to logistic disadvantage.

For U.S. LNG exports to make economic sense, domestic gas price would need to stay low, with high enough international LNG prices, and if the LNG prices are still tied to crude oil (which could change depending on market development), then crude oil prices would have to remain elevated.

While low prices are killing some of the natural gas producers, consumers will get a break via lower electricity costs. Meanwhile, U.S. natural gas trading at an 87% discount to Brent crude oil price is something even the oil industry appreciates. Valero (VLO), the world's largest independent refiner, said in a presentation this January that its refinery operations use up to 600,000 mmBtus/day of natural gas at full utilization. Betting on "low U.S. natural Gas prices for many years to come", Valero has several hydrogen and hydrocraker projects scheduled to complete by the end of 2012 to take full advantage of the low natural gas prices.

With the prospect of domestic natural gas prices remaining low and disconnected from global oil and gas prices for foreseeable future, U.S-based manufacturers of plastics, fertilizers and other products that use natural gas as a feedstock such as Dow Chemicals (DOW), Westlake Chemical Corp. (WLK), Potash (POT) and CF Industries (CF) are set to benefit from cheap U.S. natural gas as opposed to European and Asian competitors who do not.

Ps. There are only 1000 ngv filling stations state-side [~12 states without any?], while the entire world now has 13ml alternate vehicles on the roads [man, we are fast becoming a backwards frontier], pathetic!

Ps2. Slightly OT --- ***Important Geopolitical Maneuver, for a south-Asian Renaissance*** If only Pakistan and India could put behind their past grievance's, and, instead work for the betterment of their indigenous cast systems [these poor souls have 'NO' representative governments!] Solving their energy problems is a great step in the right direction for this slice of the world sitting on a potential "PowderKeg" _______http://en.wikipedia.org/wiki/Dabhol_Power_Station

We need better nuclear spent fuel facilities, we need more LNG to liquids facilities, we need more pipelines, we need more rail capacity, we need ... more infrastructure. The US is vastly underinvested in infrastructure. Why? Government regulations, government competing for money with industry, and government enriching the financial industry at the expense of everything else.

Yes, infrastructure changes - truck delivery first and pipelines second - your local utility company becomes your fuel source - at home even.

What is going on today in NG and gasoline, imports and exports has little to do with what could be done - the evidence is overwhelming that NG sources are exploding, er, exponentially increasing to become now the single largest potential BTU source in the US, even overshadowing coal, and recoverable if requiring pipelines and infrastructure missing now - much of this new information developing in the last few months, incidentally as the price of gasoline has sent every geologist in the realm out looking and has come back smelling the gas...everywhere.

The only negatives on NG are political will and that conversion in small cars is not realistic and finally who likes to carry around a pressure tank of gas. I think this last point is why a lot of pilot attempts at this have failed and like a battery car, you don't know where you can fill up. So, if infrastructure is there, the fear factor will go away.

But for trucks, new cars, SUV's there is a strong economic argument today and as it does not look like gasoline is going down for the near future, if ever, then NG will happen.

There is currently a glut because of overdrilling in dry plays in '08 and the more recent frenzy in drilling for shale plays that yield liquids....These NGL and condensates can enable a modest profit and act like a production credits....i.e. the effective price recieved can be as ~$7 per mCF produced....

There is going to be an epic flushout of the overlevered....

I saw a report that the shale NG drillers/producers have a $40 billion annual capital deficit....

I give it no more than 18-24 months before NG is at ~$5-6 again given the known decline rates for shale wells... To put it in perspective, the decline of the the existing shale NG wells is such that the equivalent production of the state of Texas has to be replaced on a *yearly* basis... And unless the new wells produce enough liquids to pay the freight, the driller will slowly go bankrupt at these gas prices...

Yes, but the resource is there - it is an act of political will to make this change away from gasoline because it is not simply the resource - it is all the delivery systems, the conversions, all of it - when the consumer rattles enough political cages it could be done but it is like getting a little bit pregnant and the build out, the commitment so huge and who would risk that given the enormous EPA hurdles at every point in the build-out - all I am saying is that the resource is there and could be tapped and a lot more could be found as it did, just like oil. If it would cut the legs out of the Mideast wars, then that in itself is worth it - and it would buy us a 100 years - which it will take to develop a replacement.

It's just another technological issue that hasn't received enough focus.

"CNG can be stored at lower pressure in a form known as an ANG (Adsorbed Natural Gas) tank, at 35 bar (500 psi, the pressure of gas in natural gas pipelines) in various sponge like materials, such as activiated carbon and metal organic frameworks. The fuel is stored at similar or greater energy density than CNG. This means that vehicles can be refuelled from the natural gas network without extra gas compression, the fuel tanks can be slimmed down and made of lighter, weaker materials."

There is a ~20 year proven and probable supply at current production rates....

There is certainly more, but it has not yet been demonstrated to be economical... Moreover, it does not justify blowing hundreds of billion on infrastructure that will be relevant for at most a few years...

Actually looks like drilling activity in Colorado is down considerably from its peak in 2007. Last year was just under 2005 levels. Who knows what this year will be like, but with only 342 wells spudded in Q1 it doesn't seem likely they will start as many wells (2992) as in 2011.

Cool!Pretty soon NG will be like nuclear electricity… too cheap to meter.

Happy days are here again..

Certainly, our beloved president will do all he can to see that this great source of clean, economical energy will help us off of our addiction to oil and dependence on foreign sources, as well as keeping our electricity bills from necessarily skyrocketing.

Conversion to LNG for transportation is an infrastructure and conversion moment that makes far more sense than Obama raising CAFE standards to 55 mpg - a crash program could convert in 5 years...but then we would have to stop the global warming hissy fit, pretend we were a resourceful nation again and throw out the politicals, the radicals and the suicide cult passing for economic planners...that, or keep sucking our thumbs...

LNG is processed NG and the US has an abundance of it, in fact, there is so goddam much NG out there in the US that it is impossible to even estimate it - and BTU values of LNG/NG are about 80,000 versus gasoline 115,000 as expressed in equivalent gallons - so at $1 a cubic foot (7 gallons) this is not difficult to figure out - - I realize that flies in the face of you zero resource clowns - but then, you have an agenda - like all central planners..and as for imports versus exports that has to do with pipelines and process facilities today - that the citizens of stupidville do not want...preferring wars in the Mideast - it has nothing to do with availability.

If you are *really* interested, Art Berman has written a number of excellent articles on the long term prospects for shale gas....He is a former editor of the Oil and Gas Journal, i.e. an industry insider

Art Berman is a former editor of O&G Journal why? He has little respect within E&P community. Basically on a mission to rationalize incorrect thesis that unconventional resources won't produce in paying quantities, epic #fail, loser.

Nope, if you want to pay $4-$5 bucks a gallon or $12 per mCF, there are still some resources to exploit... but exploiting them will not bring the price down on a sustained basis...

Once upon a time, you drilled a simple 9000 ft well in the Permian Basin and got a 2000 bpd well that flowed for years, now to replicate that in the Bakken you have to drill ~140,000 ft... Do you see a problem?

Glad to discuss Bakken decline curves Flakberman asshat. What sort of spin shall we start with? Does your mummsie let you hop paradigms or are we doing this old school, Artmeister?

I'll start, as laterals have lengthened and frac stages increased EURs have increased, the geographic extent of the area to exploit has increased and the domestic resource that is the Bakken has proven to be better than the chicken little Flakbermans said it would be.

The hyperbolic decline and projected EURs while unsettling to Artmeisters still represents a solid opportunity for deployment of capital and return on investment such that it has attracted the attention of E&P companies from around the globe much to the chagrin of pussy chicken littles like Flakberman who have to defend their case against resource plays (increasingly awkward now that their success has temporarily ruined natgas, point lost on Flakpussies)

Ok, now you tell us that the Bakken is uneconomic. Then go change your diapies.

To first order EURs don't mean shit.... it is all about flows as far as price and profitability goes...

When did I say the Bakken was uneconomic? As long as oil trades where it currently is, you will make money on shale plays that provide liquids, the same is not true for dry gas shale plays....

The E+P cos. are overpaying for any potential growth... What does it tell you when CHK is selling this "wonderful" shale assets? It tells me that CHK needs cash and that the foriegn E+Ps are desperate for any form of reserve replacement... Convince me that STATOIL is thrilled with the North Sea prospects....

The shale NG plays represent a black hole for investors to shovel cash with the service cos. being the only ones to make real money..,For the oil plays; the gains in production have been nice, but given the number of rotary rigs in operation, it works out to a net ~110 bblpd per rig per year gain which is not that impressive (overall US production)... And remember that the best shale plays are exploited first....

Lay off the insults... it serves no one...

BTW, I was into KOG at $0.30, unfortunately, sold too early ($3.00) I also cleaned up on CLR (24.00) ....Both are way too rich in price now...

Sorry, as a chemist I assumed you did not understand that LNG is processed NG (yes, it is - I can give you the process if you have insomnia) and that no, I am not advocating LNG for cars - it is simply how things are moved around in bulk industry and I understand Berman but it is not mere shale gas where this is coming from - in fact, that is the maybe the least of it.

Well, that is not really an energy question....but I will take a stab:

1) You have less range

2) Until recently, the cost differential could not justify the extra cost unless you drove a whole lot of miles:

Points 1) and 2) are somewhat at odds

Back of the envelope still tells me that only a few can really benefit even now... The conversion and compressor aint cheap, take $2 a gallon equivalent (regional prices vary far more than gasoline) and make the big assumption that the spread remains, you need to drive ~2500 gallons worth... If the spread narrows to $1, you now need ~5000 gallons worth...

it comes down to availability and the desire to convert - but really, NG would mean 100% independence with a super abundant resource and if conversion were really done, the lower BTU value (about 70% of gasoline) would be offset by much cheaper pricing based on availability, the very simple processing and distribution (no giant refineries blowing up or converting to summer gas, etc). Conversion on scale could be financed as a tax credit, or any number of ways, and figure it costs $1000 now...if there were policies and incentives this would not be a factor and would go lower and lower - and new cars could easily do this with less than $200 in costs.